Modern monetary policies ensure too many zombie companies
A top economist criticised modern monetary policies saying that they ensure too many ‘zombie’ companies, industries and banks and while suppressing interest rates central banks have succeeded in damping creative destruction.
Little vision
Central bankers are keeping interest rates low to induce inflation, which is refusing to rise, macroeconomist and internationally renowned emerging markets investment expert Dr. Jim Walker who was in Colombo to deliver the keynote address at the third Annual Sri Lanka Investment Conference, hosted by Asia Securities recently said. “We’ve got it all wrong. Interest rates are high in Asia compared with the rich countries. Asian growth is great due to more appropriate lending rates across the region. You would have theoretically expected a boom, but in the last 10 years, we’ve generated less inflation than we’ve had with double digit interest rates. I don’t know of any central banker looking at the performance over the course of the last decade who would say ‘We’ve made a real mess of this’.”
He slammed them further saying that many ‘pat’ each other on the back every year and say ‘Oh, see what a good job we’ve done saving the system. Let’s go out and try this even more’.
Productivity, growth and profitability are all being forced into a state of entropy as a result, he said. “Meanwhile, politically, the ramifications are whipping up a frenzy of establishment destruction. With interest rates close to zero the message could not be clearer to businesses: the growth outlook is dismal; do not invest to expand.”
It has never been easier to service debt in the developed world which is a bad thing, he said noting that in Asia, capital allocation disciplines are still in place. China, India, Malaysia, Taiwan and Vietnam all have interest rate levels that force companies to think carefully about investment decisions. Vietnam is legitimately the leader and Sri Lanka is legitimately the laggard, he said.
Growth is still exciting if you search for returns, he said noting that it is in these high-growth countries that future fortunes will be made which is why Western MNCs are still investing there.
Economics on its head
He added that the mantra should be to save, invest and innovate not spend, consume and protect. “Turn conventional wisdom in economics on its head. If headlines were to be believed China is in deep trouble (despite all the evidence to the contrary) and world trade is in desperate straits. It is certainly true that dollar-denominated growth in 2019 was weak but it did not contract. Asian exports experienced their second-best sales year ever. Only 2018 – the year that the trade war started and the negative narrative began – was stronger.” Within the region as a whole exports were down 2.8 per cent year on year in the first nine months. For Asia except for China they were down 4.1 per cent.
The US is ‘our’ biggest concern, Dr. Walker said noting that normally reliable forward indicators suggest that it will be entering recession within the next three quarters. “We expect it to be a relatively mild, investment-led recession. Europe is still stuttering but consensus forecasts put it at 1 per cent real GDP growth for 2020. We have no reason to demur. Japan is expected to grow at 0.4 per cent by the consensus. We expect it to grow around double that rate. In total, the developed countries could add more than US$ 1 trillion to dollar denominated demand in 2020, double 2019 levels.”
At the ensuing panel discussion he said that China is pushing capacity out of China. “There is a big opportunity for Sri Lanka in this. Sri Lanka can ride on this,” he said.
He also noted that active fund management is a better option for emerging markets such as Sri Lanka than Exchange-Traded Funds.
Ajit Gunewardene, Founder and CEO of Bluestone Capital noted that there is a strong need to create more institutional investors to change the phase of the market. “There are businesses which will hinge themselves to technology. None of this is addressed in the stock market currently. When that cycle starts working, it will be a boom time,” he said. He also noted that corporates need to be relevant with the times.
Dr. Naveen Gunewardane, Co-Founder and Managing Partner at Lynear Wealth Management, noted that the recent tax stimulus by the government will drive demand consumption. He noted that Sri Lanka well see interest rates coming down and there will be a demand for credit. But by mid next year high interest rates will kick in.
He predicted that the country will have to go to the international bond market next yeah. But he said that the year after will be the bigger question in that how much growth it will have.